BILL ANALYSIS
SENATE RULES COMMITTEE AB 1807
Office of Senate Floor Analyses
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THIRD READING
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Bill No: AB 1807
Author: Takasugi (R)
Amended: 6/22/98 in Senate
Vote: 27 - Urgency
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SENATE REVENUE & TAXATION COMMITTEE : 5-0, 6/17/98
AYES: Alpert, Hurtt, Karnette, Knight, McPherson
NOT VOTING: Burton, Greene, Kopp
ASSEMBLY FLOOR : 73-0, 5/27/98 - See last page for vote
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SUBJECT : Property tax: airline property and possessory
interests
SOURCE : Author
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DIGEST : This bill codifies a county/industry settlement
agreement relating to aircraft valuation and airport
possessory interests.
This bill is contingent on passage and enactment of AB 2318
(Knox).
ANALYSIS : Existing law provides for the valuation of
aircraft. However, the actual methodology for valuation
has been left to local assessors. A committee of the
Assessors' Association meets annually to recommend methods
for valuing aircraft. However, these valuation standards
are advisory, and actual valuation is in the hands of
individual county assessors.
Existing statute and Board of Equalization regulation
precludes assessing airline use of public airport runways
and taxiways. But court cases confirm assessors'
responsibility to assess these possessory interests.
As these issues have been particularly contentious, they
are associated with years of expensive litigation of
uncertain outcome.
This bill is one of three bills that would codify an
agreement between county assessors and airlines with
respect to valuation of aircraft and valuation of
possessory interests in airport landing facilities for
property tax purposes.
This bill provides that if aircraft are valued according to
the method agreed to in the settlement, those values shall
be presumed to be correct (i.e., anyone challenging the
value will be obliged to prove it erroneous). The value
standard would be based on the taxpayer's original cost for
the aircraft, with various adjustments.
The original cost is to be the greater of the following:
1.Taxpayer's cost for that individual aircraft reported in
accordance with generally accepted accounting principles,
so long as that produces net acquisition cost, and to the
extent not included in the taxpayer's cost,
transportation costs and capitalized interest and the
cost of any capital addition or modification made before
a transaction described in clause (2) below.
2.The cost established in a sale/leaseback or assignment of
purchase rights transaction for that individual aircraft
that transfers the benefits and burdens of ownership to
the lessor for United States federal income tax purposes.
If the original cost for leased aircraft cannot be
determined from information reasonably available to the
taxpayer, original cost may be determined by reference to
the "average new prices" column of the Airliner Price Guide
for that model, series, and year of manufacture of
aircraft. If information is not available in the "average
new prices" column for that model, series, and year, the
original cost may be determined using the best indicator of
original cost plus all conversion costs incurred for that
aircraft. In the event of a merger, bankruptcy, or change
in accounting methods by the reporting airline, there shall
be a rebuttable presumption that the cost of the individual
aircraft and the acquisition date reported by the acquired
company if available, or the cost reported prior to the
change in accounting method is the original cost and the
applicable acquisition date.
Original cost, plus the cost of any capital additions or
modifications not otherwise included in the original cost,
shall be adjusted from the date of the acquisition of the
aircraft to the lien date using the producer price index
for aircraft and a 16-year straight-line percent good table
starting from the delivery date of the aircraft to the
current owner or, in the case of a sale/leaseback or
assignment of purchase rights transaction, as described in
this section, the current operator with a minimum combined
factor of 25 percent, unless this adjustment results in a
value less than the minimum value for that aircraft
computed to the paragraph below, in which case the minimum
value may be used. If original cost is determined by
reference to the Airliner Price Guide "average new prices"
column, the adjustments required by this paragraph shall be
made by setting the acquisition date of the aircraft to be
the date of the aircraft's manufacture.
For certificated aircraft of a model and series that has
been in revenue service for eight or more years, the
minimum value shall not exceed the average of the used
aircraft prices shown in columns other than the "average
new prices" column for used aircraft of the oldest aircraft
for that model and series in the Airliner Price Guide most
recently published as of the lien date. Minimum values
shall not be utilized for certificated aircraft of a model
and series that has been in revenue service for less than
eight years.
For out-of-production aircraft that were recommended to be
valued by a market approach for 1998 by the California
Assessors' Association, assessments will be based at the
lower of the following:
(a) The values established by the Association for the 1998
lien date.
(b) The average of the used aircraft prices shown in the
columns other than the "average new prices" column for
used aircraft of the five oldest years for the aircraft
model and series or that lesser time for which data is
available in the Airliner Price Guide.
In computing assessed value, the assessor may allow for
extraordinary obsolescence if supported by market evidence
and the taxpayer may challenge the assessment for failure
to do so. To constitute market evidence of extraordinary
obsolescence and to permit an assessment appeal, the
evidence must show that the functional and or economic
obsolescence is in excess of 10 percent of the value for
the aircraft model and series otherwise established
pursuant to the above formula.
Specifies if the Airliner Price Guide ceases to be
published or the format significantly changes, a guide or
adjustment agreed to by the airlines and the taxing
counties shall be substituted.
In order to calculate the above values, the taxpayer is, to
the extent information is reasonably available to the
taxpayer, to furnish the county assessor with an annual
property statement that includes the original costs as
defined above. In the event the air carrier that has this
information reasonably available to it fails to report
original costs and additions, as requested by law, an
assessor may in that case make an appropriate assessment
pursuant to Revenue and Taxation Code Section 501.
The bill also contains a county-by-county table of credits
against future tax. The credits would range from $18.3
million for Los Angeles, $13.5 million for San Mateo, and
$4.5 million for Alameda, down to $500 for Humboldt County.
These credit amounts are the amounts that each of the
counties has agreed to accept as its settlement amount, in
order "to dispose of certain lawsuits and assessment
appeals that have been filed, and to preclude the filing of
other claims relating to (1) the assessment, equalization,
and accessibility of certain possessory interests in
publicly owned airports and (2) aircraft valuation and
equalization" by 13 named airlines. The credits would be
spread equally over the 1998-99 through 2002-03 fiscal
years.
The following are the counties affected by the bill
containing the credits against future tax:
Alameda ............................... $ 4,455,110
Contra Costa ........................ 1,000
El Dorado ............................ 1,000
Fresno .................................. 264,630
Humboldt ............................. 500
Kern .....................................
33,540
Los Angeles ......................... 18,335,720
Monterey .............................. 148,560
Orange .................................. 2,916,995
Riverside ............................... 435,780
Sacramento ............................ 1,070,185
San Bernardino ...................... ,991,405
San Diego .............................. 4,262,610
San Joaquin ........................... 1,000
San Mateo ............................. 13,544,005
Santa Barbara ........................ 167,880
Santa Clara ............................ 2,369,080
Solano .................................... 1,000
The 13 airline companies mentioned in the bill are as
follows:
Alaskan Airlines Inc.
American Airlines, Inc.
Continental Airlines, Inc.
Delta Airlines, Inc.
Federal Express Corporations
Northwest Airlines, Inc.
Trans World Airlines, Inc.
United Airlines, Inc.
United Parcel Service
U.S. Airways, Inc.
Wings West Airlines
Southwest Airlines
America West Airlines
Then bill specifies that with respect to America West
Airlines only, the waiver or settlement agreement requested
by the bill may exclude the claims that American West
Airlines has already raised in the adversary proceedings in
the bankruptcy proceedings entitled "In Re America West
Airlines, Inc., Case No. 91-07505 PHX-RGM" against the
Counties of Orange, San Bernardino, Sacramento, San Mateo,
Alameda, and San Diego, provided that the settlement
agreements or waivers provide that the resolution of any of
America West's adversary claims will have no legal effect
for any tax year not at issue in those adversary
proceedings.
States the intent of the Legislature that this bill is to
facilitate recordation of the disputes over the assessment
of certificated aircraft by codifying recommendations
produced by a county and airline industry working group,
that do all of the following:
1.Establish valuation methodology for certificated
aircraft.
2.Clearly establish a presumption of correctness of county
assessors follow the assessment methodology set out in
this measure and in AB 2318.
3.Dispose of certain outstanding litigation and appeals
over aircraft valuation.
4.Mitigate the financial impact of the statutory charge on
local governments and schools by establishing a method by
which the issuance of any prior years refunds to
litigating airlines would be treated as credits against
future tax payments.
States AB 1807 is to become operative only if AB 2318 is
enacted and becomes effective on or before January 1, 1999,
and in that event is to become operative on the date of the
effective date of the bill and the effective date of AB
2318.
Three-Bill Package
AB 1807 (Takasugi) and AB 2318 (Knox) are products of
lengthy negotiations between counties and the airline
industry over the valuation of airline real property
interests in publicly-owned airports (possessory interests)
and airline personal property aircraft. Those bills codify
the recommendations of a county/airline industry working
group. Jointly, these measures establish valuation
methodology for these possessory interests and personal
property which are presumed correct. In addition, they
dispose of outstanding lawsuits and assessment appeals
estimated at nearly $250 million. In exchange for
dismissal of pending lawsuits and assessment appeals, the
affected counties will allow up to $50 million in credits
against the future airline industry property tax
liabilities. The $50 million is made available in five
equal annual installments of $10 million each industry in
fiscal year 1998-99. Los Angeles County anticipates that
normal growth in airline industry values and the valuation
methodology set forth in the bills will provide revenue
increases that will more than offset the credits to be
provided in future years as a result of these measures.
SB 30 (Kopp) allows a county or city to enter into a
settlement with a taxpayer to substitute credits against
future tax liabilities.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
This bill is part of a legislative package that would
codify a settlement agreement between counties and airlines
regarding litigation and appeals of various assessments of
aircraft and real property rights at airports.
Many court cases and assessment appeals regarding the
airline industry are currently outstanding. In aggregate,
they involve millions of dollars in property tax for past,
current, and future tax years. The large amount of tax
revenue involved is evidenced by the $50 million in credits
against future taxes which is specified in this bill.
The actual revenue effect of the settlement package is
indeterminate, since the eventual outcome of the pending
litigation and appeals, if carried to conclusion, cannot be
known. That is, the $50 million specified in the bill is
probably substantially less than the amount of county
losses should all current litigation be pursued.
SUPPORT : (Verified 6/24/98)
Los Angeles County
San Mateo County
Johan Klehs, State Board of Equalization member
ARGUMENTS IN SUPPORT : The bill and its companions, SB 30
(Kopp) and AB 2318 (Knox), reflect a settlement package
agreed to by 18 counties and 13 airlines, relating to
valuation of commercial aircraft, and to the taxability of
possessory interests in various airport facilities. These
are issues over which the counties and airlines have feuded
for many years, with neither side having confidence that
its view will prevail should litigation go to conclusion.
In the face of such uncertainty, and with little desire to
spend the rest of their careers in court, the opposing
parties have negotiated a broad agreement, including
valuation standards which are agreed upon, and a schedule
of credits against future tax. This is probably the most
efficient way of resolving an essentially intractable
problem.
ASSEMBLY FLOOR :
AYES: Ackerman, Aguiar, Alby, Alquist, Aroner, Ashburn,
Baca, Baldwin, Battin, Baugh, Bordonaro, Bowen, Bowler,
Campbell, Cardoza, Cedillo, Cunneen, Davis, Ducheny,
Escutia, Figueroa, Firestone, Frusetta, Gallegos,
Granlund, Havice, Hertzberg, Honda, House, Kaloogian,
Keeley, Knox, Kuehl, Kuykendall, Leach, Lempert, Leonard,
Machado, Margett, Martinez, Mazzoni, McClintock, Migden,
Miller, Morrissey, Morrow, Murray, Olberg, Oller, Ortiz,
Pacheco, Papan, Perata, Poochigian, Prenter, Pringle,
Richter, Runner, Scott, Shelley, Strom-Martin, Sweeney,
Takasugi, Thompson, Thomson, Torlakson, Vincent,
Washington, Wayne, Wildman, Woods, Wright, Villaraigosa
NOT VOTING: Brewer, Brown, Bustamante, Cardenas, Floyd,
Goldsmith, Napolitano
DLW:sl 6/24/98 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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